Eclipse Film Partners (No. 35) LLP v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 December 2013 |
| Neutral Citation | [2013] UKUT 639 (TCC) |
| Date | 20 December 2013 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Honourable Mr Justice Sales
[2013] UKUT 0639 (TCC)
Carrying on a trade - Edwards (HMIT) v Bairstow(1955) 36 TC 207 - Jones v First-tier Tribunal[2013] UKSC 19, [2013] 2 AC 48 - business involving the exploitation of films with a view to profit - Income Tax (Trading and Other Income) Act 2005 ("ITTOIA 2005"), Income Tax (Trading and Other Income) Act 2005 section 609s. 609.
The Upper Tribunal upheld the decision of the First-tier Tribunal that a film partnership did not carry on a trade in the relevant period.
Eclipse Film Partners (No. 35) LLP (the "Appellant") had entered into arrangements in relation to the distribution of two films produced by the Disney group of companies. On 15 May 2009, HMRC (the "Respondents") issued a closure notice relating to the Appellant's tax return for the period ended 5 April 2007 (the "relevant period") which included the determination that the Appellant "carried on neither a trade nor a business and there was no trade or business carried on with a view to a profit." The Appellant appealed against this determination and the First-tier Tribunal (Eclipse Film Partners (No. 35) LLPTAX[2012] TC 01963) held that the Appellant did not carry on a trade in the relevant period. The Appellant appealed to the Upper Tribunal.
A limited liability partnership ("LLP") is a body corporate and as such would ordinarily be subject to tax under the corporate tax regime. However, ITTOIA 2005, section 863s. 863 provides for the LLP's activities to be treated for tax purposes as having been carried on in partnership by its members where the LLP "carries on a trade, profession or business with a view to a profit". This brings into play various provisions allowing for certain tax reliefs in respect of the members including, as is relevant in this case, tax relief in respect of interest paid on borrowing by the members of the LLP for the purposes of contributing capital to the LLP (ICTA 1988, section 353s. 353 and section 362362 since rewritten into ITA 2007, part 8 chapter 1Pt. 8, Ch. 1). ICTA 1988, section 362s. 362(1)(b) (since rewritten as ITA 2007, section 398 subsec-or-para 2s. 398(2)(b)) provides that relief is available where the funds contributed to the LLP are used "wholly for the purposes of the trade, profession or vocation carried on the partnership". In this case, although the formal question regarding the lawfulness of the closure notice turned on the application of ITTOIA 2005, section 863s. 863, the parties were more interested in the ability of the members of the Appellant to claim tax relief in respect of the borrowings they had made. The parties used the appeal against the closure notice as an opportunity to test HMRC's determination on the trading issue.
The Upper Tribunal upheld the decision of the FTT that the Appellant did not carry on a trade in the relevant period. The FTT had also held that the activities of the Appellant amounted to "a business involving the exploitation of films which does not amount to a trade", that is, a "non-trade business" within ITTOIA 2005, section 609s. 609. As emerged at the hearing before the Upper Tribunal, the logic of the FTT's findings was that it should have allowed the appeal against the closure notice on the narrow basis that the Appellant carried on a business with a view to a profit. The Upper Tribunal allowed the appeal against the closure notice on this basis.
In arriving at its decision, the Upper Tribunal considered further evidence in the form of certain agreements (the "Prior Agreements") between entities in the Disney group of companies, and evidence from an expert on the law in California which had not been available at the hearing before the FTT. The effect of the Prior Agreements, which had not been fully understood by the Appellant at the time, was to limit the rights ostensibly granted to the Appellant. The Respondents argued that the FTT had mischaracterised the contractual effect of the Prior Agreements and that, when their true effect was understood, the Prior Agreements provided further grounds to conclude that the Appellant had not been carrying on a trade. The Upper Tribunal agreed with the Respondents that the FTT could now be seen to have mischaracterised the contractual effect of the Prior Agreements. However, this mischaracterisation did not have a significant impact on the analysis of the question whether the Appellant was trading or not. Firstly, although the value of the rights granted to the Appellant were reduced this did not render those rights valueless. Secondly, the trading issue was to be determined by reference to the state of mind of the Appellant and the circumstances as they appeared to the Appellant at the time: "the purposes, intentions and plans of Eclipse 35 [The Appellant] cannot sensibly be assessed other than by focusing on what it thought was going on, even if in some respects its appreciation of the underlying factual position may have been mistaken."
On the face of it this is a victory for the LLP, the Upper Tribunal having allowed its appeal against the closure notice issued by HMRC, but it won't feel like it for the LLP's members. On the big question - whether or not the LLP was trading - the Upper Tribunal came down squarely in HMRC's corner.
Graham Aaronson QC & Jolyon Maugham, instructed by Freshfields Bruckhaus Deringer LLP appeared for the Appellant
Malcolm Gammie QC, Rajesh Pillai & Rebecca Murray, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
[1]This is an appeal from a decision of the First-tier Tribunal (Tax Chamber) (Edward Sadler and John Walters QC - "the FTT"), [2012] TC 01963, in which it dismissed an appeal by the Appellant ("Eclipse 35") against a Notice of Completion of Enquiry dated 15 May 2009 ("the closure notice") issued by the Respondents ("HMRC"). Save as otherwise indicated, paragraph references in square brackets in this judgment are to the paragraphs in the FTT's decision.
[2]Eclipse 35 is a limited liability partnership. The closure notice referred to Eclipse 35's tax return for the period ended 5 April 2007 and included the determination that Eclipse 35 "carried on neither a trade nor a business and there was no trade or business carried on with a view to profit." It was this determination which Eclipse 35 appeals against. It does so on the ground that it maintains that in the relevant period it carried on a trade with a view to profit.
[3]The FTT held ([20] and [410]-[413]) that Eclipse 35 did not carry on a trade in the relevant period. It is against this ruling that Eclipse 35 appeals to the Upper Tribunal.
[4]The FTT also held ([20] and [414]) that the activities of Eclipse 35 in the relevant period amounted to "a business involving the exploitation of films which does not amount to a trade", that is, a "non-trade business" within section 609section 609 of the Income Tax (Trading and Other Income) Act 2005 ("ITTOIA"). The FTT was of the view that Eclipse 35's activities, if they had amounted to trading, were carried on with a view to profit ([21] and [415]). There has been no appeal by either party against these parts of the FTT's decision.
[5]As emerged at the hearing before the Upper Tribunal, the logic of the FTT's conclusions at [414] and [415] is that, even taking account of its ruling that Eclipse 35 did not carry on a trade, it should have allowed the appeal against the closure notice on the narrow basis that in the relevant period Eclipse 35 carried on a business with a view to profit. Both parties agree that if Eclipse 35's appeal to the Upper Tribunal on the issue of carrying on a trade fails, the Upper Tribunal should nonetheless allow the appeal on the limited ground that HMRC erred in their determination in the closure notice that Eclipse 35 did not carry on a business with a view to profit.
[6]In my judgment, that is the proper outcome of this appeal. For reasons which I set out below, I dismiss Eclipse 35's appeal on the trading issue. However, I allow the appeal against the closure notice and the FTT's decision on the narrow ground that in the relevant period Eclipse 35 carried on a business with a view to profit.
[7]The reason the appeal to the FTT focused solely on the trading issue lies in the statutory context. It was only if Eclipse 35 carried on a trade that important tax advantages would arise for the members of the Eclipse 35 limited liability partnership.
[8]Being a limited liability partnership, Eclipse 35 is a body corporate and as such would ordinarily be subject to tax under the corporate tax regime ([23]-[24]). However, in certain circumstances the tax code provides for there to be "transparency" in relation to a limited liability partnership, so that its activities are treated for tax purposes as having been carried on in partnership by its members ([24]-[27]). In the case of individuals who are members, as is relevant here, section 863section 863 ITTOIA provides for transparency and attribution of the activities of a limited liability partnership to its members for income tax purposes "if a limited liability partnership carries on a trade, profession or business with a view to profit" (Income Tax (Trading and Other Income) Act 2005 section 863 subsec-or-para 1section 863(1)).
[9]Where transparency operates, the profits of a limited liability partnership, as attributed to its members, form part of the income of its members and are subject to income tax under section 5section 5 ITTOIA ([26]). However, as an aspect of treating such profits as income of the members, various provisions allowing for certain tax reliefs in respect of the members also come into play ([27]-[31]). The present case concerns the availability to the members of Eclipse 35 of tax relief in respect of interest paid on borrowing by them for the...
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